Inequality Aversion and the Optimal Composition of Government Expenditure
AbstractThis paper examines the choice of government expenditure on public goods and transfer payments, in the form of a pension, in an overlapping generations model. Government expenditure is tax-financed on a pay-asyou- go basis. A utilitarian judge chooses expenditures to maximize a social welfare function. The nonlinear solution is found to involve the ratio of a welfare-weighted average income, which depends on the inequality aversion of the judge, to arithmetic mean income. An approximation for this ratio is found which produces explicit solutions for the optimal composition. The result is used to obtain an indication of ‘implicit’ inequality aversion for a range of countries.
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Bibliographic InfoPaper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1086.
Length: 25 pages
Date of creation: 2009
Date of revision:
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More information through EDIRC
Overlapping Generations; Composition of Government Expenditure; Utilitarian Social Welfare Function;
Other versions of this item:
- Creedy, John & Li, Shuyun May & Moslehi, Solmaz, 2010. "Inequality Aversion And The Optimal Composition Of Government Expenditure," Macroeconomic Dynamics, Cambridge University Press, vol. 14(S2), pages 290-306, November.
- D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
- H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
- H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
- H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
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